Revising Fertilizer Subsidy and Taxes Policy for Reducing Cost of Production of Major Crops in Pakistan

Reduction in cost of production to make agriculture profitable is a major challenge and all outefforts have been made by successive government in Pakistan to pass benefits to the farmers by reducing inputprices through reduction in GST, providing cash subsidy and supplying inexpensive feed gas for fertilizerindustry. Currently, cash subsidy on urea is costing Rs. 12 billion to national exchequer and total tax relief (allproducts inclusive) costing around Rs. 40 billion to the national exchequer, respectively. Thus, total financialimplication of subsidy and tax relief is Rs. 52 billion. In the existing tax regime tax rates vary greatly from3.55% (SSP) to 11.73% (NPK). Due to these distortions farmers prefer to use higher dosages of Urea and lowgrade P-based fertilizers. This anomaly is negatively affecting productivity of major crops in general and highvalue crops in particular. Presently average weighted tax rate on all fertilizers is 5.83 percent. The impositionof uniform tax rate of 5% on all fertilizers, without cash subsidy on urea will reduce financial implicationto Rs. 43 billion and at 2% tax rate financial implication will be Rs. 53.7 billion per annum. Imposition ofuniform tax rates will result into decrease in market prices of fertilizers, consequently their use will be higherand balance among nutrients application will improve. The Imposition of uniform tax rate of 2% will reducefertilizer cost for production of major crops by; 18% for wheat, 13% for rice, 20% each for cotton and sugarcane.Modest increase in crop productivity by just 5% could result in additional production of major crops(wheat, rice, cotton, sugarcane and maize) of worth Rs. 111.57 billion. While, existing production levels ofmajor crops can be obtained by reducing area under these crops by 859 thousand hectares, and spared area canbe brought into cultivation under high value crops to diversify the cropping systems.